Sarnoff's Law emerged from the advent of radio and television networks in the early twentieth century, in which a central source broadcasts from a small number of transmitting stations to a large number of receivers. Broadcast pioneer David Sarnoff pointed out that the value of broadcast networks is proportionate to the number of viewers.
What happens when you link devices based on Moore's Law? When ARPA wizards gathered at the Xerox Palo Alto Research Center (PARC) in the early 1970s to create the first personal computers, one of the engineering aces, Bob Metcalf, led the team that invented the Ethernet, a high-speed network that interconnected PCs in the same building.
Metcalf left PARC, founded 3Com, Inc., cashed out and came up with Metcalf's Law, which describes the growth of value in networks. The math is simple and based on a fundamental mathematical property of networks: the number of potential connections between nodes grows more quickly with the square of the numbers of nodes.
If you have two nodes, each with a value of one unit, the value of joining them is four units. Four interconnected nodes, each still worth one unit, is worth sixteen units when networked, and one hundred nodes is worth one hundred times one hundred, or ten thousand. When value increases exponentially more quickly than the number of nodes, the mathematical consequences translate into economic leverage. Connecting two networks creates far more value than the sum of their values as independent nodes.
EBay won because it facilitated the formation of social groups around specific interests. Social groups form around people who want to buy or sell teapots or antique radios. At that time, I had been reading Fukuyama about social capital. Fukuyama argues in his book Trust, that there is a strong correlation between the prosperity of national economies and social capital, which he defines as the ease with which people in a particular culture can form new associations.
I realized that the millions of humans who used the millions of computers added another important property - the ability of the people to form groups. I remembered that when it became possible to send and reply to entire groups in email, it became possible to create ad hoc discussions. Since then, all sorts of chat rooms, message boards, listservs, buddy lists, auction markets, have added new ways for people to form groups online.
Reed, using his law to analyze the value of different kinds of networks, believes he has discovered an important cultural and economic shift. When a network is aimed at broadcasting something of value to individuals, like a television network, the value of services is linear. When the network enables transactions between the individual nodes, the value is squared. When the same network includes ways for individuals to form groups, the value is exponential!
That means you raise two to the power of the nodes instead of squaring the number of nodes. The value of two nodes is four under Metcalf's law and Reed's Law, but the value of ten nodes is one hundred (ten to the second power) under Metcalf's Law and 1024 (two to the tenth power) under Reed's law - and the differential rates of growth climb the hockey stick curve from there.
Get it!